Saturday, 26 March 2011

The taxing duty of adding value

It was the budget on Wednesday. Oh, you know. Beer duty went up by quite a lot. You know that too I guess. You may also know that there is an extra tax on high ABV beers above 7.5%. But, according to you, that's OK because the duty on low ABV beer, below 2.8%, has been halved. Unfortunately, what you haven't realised, is that this will only be useful to brewers who produce over 5000hl per year; People like Molson Coors, InBev, Fullers, Marstons and BrewDog. You see, they will get the same discount on beer duty we do for beers under 2.8%, but as we already get that discount the revenue is not prepared to give us anymore. This is effectively the start of a reversal of progressive beer duty. To pay for this extra perk, which will only be applicable to things like supermarket own brand beers and C2, those of us who make quality beers, some of which are over the 7.5% threshold, will most certainly lose out. No microbrewer who is brewing below 5000hl will benefit. NOT A SINGLE ONE.

Some time ago I wrote that I didn't think beer duty was a significant problem to the pub industry. At the time I was running a pub with high overheads and brewing my own beer. Evaluating things across the board, at that time, my perspective was that beer duty was only a relatively small cost of serving beer in a pub. Indeed, as a proportion of the overall taxation I was paying, beer duty was relatively small. Pubs pay a significant amount of VAT for instance. Staff PAYE and NI contributions is significant. On top of that there are taxes like employers NI contributions, a hidden tax on employing people, and these are shockingly high.

The overall picture of alcohol taxation, as shown in the above chart, is certainly very complex. The vast majority of beer is still taxed lower than wine, whisky, alcopops and the margin between them does not appear to have significantly changed. What has changed is that major brewers have now been given an incentive to make more lower ABV beer and quality high ABV beer is being treated as a high quality, high value commodity, a bit like wine and whisky.

"Things as certain as death and taxes, can be more firmly believed" - Daniel Defoe, The Political History of the Devil, 1726

I don't like taxation. I do like some of the benefits it brings. I quite like the fact that the NHS saved my life at least once. I like the fact that they fixed my broken leg and both my hernias have been repaired without any need for me to have medical insurance or dip into savings I haven't got.

I like the fact that my children are receiving a good education, the police, ambulances and fire brigade respond quickly when called, and yes, I've had reason to call all of them.

I do worry that we send too many people through higher education only to have to invent bureaucracy so we can find suitable pen pushing jobs that the country really doesn't need. I think more people should be prepared to get their hands dirty, rather than pretending that an economy can somehow exist purely on a population of graduates and no migrant workers. And there, that betrays an opinion in me that feels that although taxation is necessary in a civilised society, I do wonder if generally it is a little high right now, and high because the populous has an unrealistic utopia in mind. I do think the tax burden is too high in this country and on the day there are marchers in London I wonder how those who condemn beer duty can then take part in such marches. I support the government's cost-cutting, it's the only way we will see taxation reduced. The only alternative is to support increases in taxation.

Still, we elected the government, this one and the last, and we must all accept the policies, spending decisions and taxation regimes imposed. I do think that they are influenced by overall public opinion, even if you and I feel that they don't match our ideals, but then they never will, because like all of us, our ideas are quite rightly different. Most of all I am grateful I can help vote out the buggers in charge, many people in the world can't.

It was recently pointed out to me that going to the pub is a luxury, drinking beer is a luxury. I remember my mother telling me so many years ago. VAT and duty are applied to things the government think are luxuries. Duty is applied specifically to things that are bad for us or society. Unfortunately, public opinion would agree that the government is generally right on these points. Most of the public would agree that alcohol is bad for us and moreover bad for society. The fact that you and I don't see it that way is unlikely to change public opinion.

Conversely, VAT is not charged on things that are good for us or are essential for us to live. Bread, potatoes, safety equipment, books, cakes, cheese, meat and vegetables are exempt from VAT. Biscuits, ready meals, fast-food, fizzy drinks, TVs, DVDs, computers, motor cars all attract VAT because you do not need them to live. Fuel for cars, alcohol and tobacco attract extra duty because they are bad for us, society or the environment and arguably if you spend lots on these products you have more money than sense. All of this counteracts the common accusation of purchase taxation and duty being regressive.

There is significantly less money coming from tobacco, and as a result of healthier society more people are living longer, costing social services, hospitals and care homes more. Perhaps this is the real reason alcohol duty is on the increase. I don't really buy the whole "alcohol is costing the NHS millions" argument - we are all getting healthier and living longer, the tax burden of that is immense.

Some years ago a very knowledgeable publican and successful business man pointed out, by way of up-selling I suspect, that buying a slightly more expensive bottle of wine was gaining significantly better quality.

"This basic wine has a lot of duty on it" he explained "This slightly more expensive wine has exactly the same amount of duty on it, the extra all goes into quality"

I suspect this is what James Watt is eluding at in comments to the MA, not too eloquently I'm afraid, in his usual out spoken style. He does it rather better on the BrewDog blog. However, if you consider for a moment that underneath this there is a valid point, quality beer is a quality product. Drinking beer in a pub, bar or restaurant is a luxury. Consider the total percentage tax (VAT plus duty) on a pint in a pub, which is about 32%1, and compared that to a pint tin in a supermarket where VAT plus duty is 59%2.

As the price you pay for your beer goes up a greater proportion of the price goes to the upkeep of the pub, better ingredients in the beer and investment in the brewery. In the supermarket cheap slabs of beer are almost entirely revenue for the tax man. Conversely, higher cost craft3 brewed beer represents significantly better value than macro-brewed beer.

I'm still outraged that beer duty has increased 43% since I started brewing in 2005. I'm extremely outraged by the fact that I will have to pay 50% more duty on my beers above 7.5%, beers that were a significant part of my business plan. I'm also outrages that the low ABV duty relief will do me no go whatsoever, but others are claiming it a success. However, there is an argument that the quality end of the market should be less financially sensitive to the extra tax burden, compared to bigger brewers.

SIBA sent out a circular very shortly after the budget was announced. There is a key issue surrounding the use of progressive beer duty for discounting beer from small producers. PBD is not supposed to allow small producers of beer to undercut the big boys, but there is an element of this going on.

"While no changes were made in the Budget to Small Brewers Relief (Progressive Beer Duty) it is incumbent on all brewers to realize that the relief is intended for investment in jobs and capital in the industry and to relieve the dis-economies of scale of the smaller brewers. Duty increases should be applied in full to prevent any accusations that small brewers are using the relief to discount prices."

That plays to the argument that small brewers should be concentrating on quality and investment, not fighting a pointless battle of price cutting. I know every drinker wants their beer to be reasonably priced, there is nothing wrong with that, but there are sectors of the market where price is driving down quality, and that is not what I want good beer to be about.

I believe that is what BrewDog are also trying to say, even if they are trying to simply get free publicity out of saying it.

Right, best go and adjust my price-list then.

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1Assuming 4% beer sold at £2.70 a pint.

2Assuming 4% beer sold at £1.00 a pint.

3Yes, I know the jury is out on what defines "craft" and I get the issues with this, but for me craft beer is any beer that is brewed with a mind to quality rather than price. It's a sliding scale of course and I do not draw a solid line.

13 comments:

Very well-argued post, as usual. Whether you like it or not (and I certainly don't), the duty increase is a fact of life and brewers and pub operators have to live with it - bemoaning your fate gets you nowhere.

You are also right to say that the main result of the 2.8% duty cut will not be lots of tasty low gravity real ales, but cheaper mass-market lagers. Expect 2.8% versions of Carling, Fosters and Carlsberg to appear come next October.

Well, I'll be sorry not to see you here again, I'd like to think that's a registration of objection rather than a proper "bye". I know your views are somewhat left of mine, just like Mudgie's here are probably a little right of mine. That should not inhibit intelligent discussion as we have dome in the past.

You are entitled to your view just the same as me. You may well think that taxation should be increased to take care of the deficit. Perhaps bankers should be taxed further for instance. That is a valid view point, just not one I can agree with right now.

If it is worth anything, I looked at the spending and taxation policies as best I could through the eyes of independent analysts before the election. It would seem in reality there was little between Labour and Conservatives.

This post is rather right wing biased, I accept that. It's not really me anymore than I am a business man and therefore tend to lean to the right a little. This does not make me insensitive to the plight of many people who find themselves in real hardship. There is a smidgin of a socialist in me somewhere.

But, what really gets me about politics is the polarisation and lack of willingness to find a middle ground. Rather than each side sideswiping and spitting out dummies.

I'd like to think Phil, that you will see that this post is going part of the way to accepting, with reluctance, that although the beer duty increases are going to hurt me they will not effect me as much as some of the cuts are going to hurt other people.

Dave, we rely on the BD boys to be opposed someone or other (Portman, CAMRA, SIBA scotland, etc, etc, yawn) - I'm sure we're all proud of them for standing up so bravely against the poor people and their low-class indulgences.

I don't want this to turn into a political debate, but surely whatever your point of view, the only way taxation (across the board) can be reduced is to reduce government expenditure. Obviously we can argue about what should be cut, and what should be taxed.

If you want higher spending, and higher taxation, fair enough, feel free to make that argument.

I would also argue that the latest increase in alcohol duties has passed the "tipping point" on the Laffer Curve where higher nominal rates actually bring in less revenue.

Yes Stringers, I didn't mention the fact that low paid people will suffer the most from increases in beer duty. There is nothing wrong with buying a load of low cost tinnies from the supermarket. We are sure to see the cost of doing that go up significantly.

Mudgie, exactly. I'm very happy for people to think taxation should go up rather than spending go down. I don't agree with it but it's a valid course of action.

But, I think that it is important that people can protest. I may not particularly agree with the marchers but I would defend their right to peaceful protest.

I'm pleased that the BBC at least have been reporting that the violence and damage was the result of only a few hundred idiots. The vast majority of protesters were very peaceful.

Mudgie, I agree that it can be irritating that public order offences, and indeed the policing costs associated with such large scale rallies can indeed slightly worsen the very thing that the objectors are objecting about. But even so, I still defend their right to do so. The link you post starts as part of the first sentence "leftie lowlife scum" which I think would be as bad as someone calling you a "Arrogant right wing nutter" I don't think the majority of left wing activists are lowlife scum any more than you or I are arrogant nutters. Well, you're not anyway.

'I support the government's cost-cutting, it's the only way we will see taxation reduced.'

Been to Ireland recently? If the pace of cuts hits growth (and we'll all be watching 1Q 2011's GDP reading with interest - a second consecutive negative quarter and we'll officially be back in recession), tax receipts will come in lower than expected and taxes will need to rise to plug the gap - potentially creating a downward spiral. We've already seen the Office for Budget Responsibility downgrade its growth forecasts - growth reduces deficits faster than spending cuts every time.

Labour's been genuflecting towards articulating this logic, but it has more convincingly been written about by David Blanchflower and Paul Krugman. I'm not saying your view is not arguable - but I'm keen to point out to you and your readers that there is more than just a 'save our hospitals!' argument against the coalition's fiscal plans.

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